Advantages and Disadvantages of Transferring buy-to-let property to a limited company

After the introduction of section 24 of the Finance Act 2015 in April 2017, landlords can no longer deduct mortgage interest and other finance costs from their rental income before calculating their tax liability. Instead, landlords will only be able to claim a 20% deduction on their finance costs. This has led to a huge shift in buying properties through limited companies, with many landlords now considering whether they should incorporate their existing property portfolio.

Let’s look at some of the merits and demerits of holding properties in a limited company.

Advantages of transferring property ownership to a limited company

Some of the key benefits are –

1.Restrictions on mortgage interest relief don’t apply to a limited company-

Until 2017, Landlords could deduct all mortgage interest payments from their tax bill, which means they were taxed on profits, not turnover, resulting in a reduction of their tax amount. Still, after the changes introduced in April 2017, the amount of mortgage cost they can offset against their income has reduced every year until 2020, and now they will be taxed on all their rental income and given a 20% tax credit. It means that the basic rate taxpayers may remain unaffected, but the taxpayers under higher rate or additional rate category will need to pay higher taxes. In contrast, by shifting towards a limited company, the mortgage or finance cost can be deducted from the company’s profits,as the restrictions do not apply to a limited company. Companies can easily claim mortgage interest as an expense against their property profits.

2.Corporation tax rates are lower than Income tax rates-

The second most important benefit of transferring property ownership to a limited company is corporation tax. Private landlords could benefit from paying corporation tax at a lower rate rather than paying income tax at a higher rate. Currently, the corporation tax is charged at 19% (For FY 2023-24), compared to income tax rates of 40-45%. Hence, the corporation tax is much lower than that of income tax, which landlords are paying right now.

3.Separate legal status-

Limited companies are considered as separate legal entities and therefore offer limited liability protection to landlords.

4.Opportunities for tax planning – spouse, expenses, dividends-

Holding properties in a limited company, can offer various tax benefits. When a property is owned in the landlord’s name, they need to pay income tax as an individual on all of the profits. In contrast, when a property is owned through a limited company, rental profit will only be subject to the lower rate of corporation tax and rest of the funds are retained as reserves and can be reinvested into properties, topping up the pension for directors or paying out the same as tax-efficient dividends. Landlords can also add their spouse for more tax-efficient extraction of funds.

Also See:Apply for Refund of Additional 3% Stamp Duty Land Tax (SDLT) Surcharge

5.Stamp Duty-

Landlords could consider the option of selling the company instead of the property. Stamp duty land tax on shares is 0.5%, making it more attractive for the purchaser.

6.Inheritance tax planning-

For landlords planning to pass their business to family members, succession planning is a lot easier with limited companies.

Disadvantages of transferring property ownership to a limited company

Apart from the advantages, there are some disadvantages which a landlord needs to consider while transferring property ownership to a limited company–

1.Capital Gains Tax and SDLT-

If an existing property is transferred to a limited company, it will be subject to capital gains tax and stamp duty tax. The stamp duty land tax will be based on the market value of the property being transferred.

Also See:Don’t Forget to Pay your Capital Gains Tax within 30 Days!

2.Few lenders provide mortgages for limited company buy-to-let and mortgage rates are high-

There are few, or not many lenders who provide mortgages for a buy-to-let limited company and those that do may pay higher interest. There is a possibility of change if this market will grow continuously and become popular in the near future.Many lenders have entered the market and as per the recent statistics in March 2020 48% of lending went to limited companies.

3.Taking your dividend profits will be subject to tax-

After the tax-free dividend allowance of £1,000, the dividends will be subject to the landlord’s marginal rate of tax, which could be 33.75% or 39.35%.

4.ATED-

The company will need to file Annual Tax on Enveloped Dwellings (ATED) return if the value of the property is above £500,000.

5.Compliance Costs-

The additional administration required to manage a company will result in additional compliance costs.

Conclusion

Transferring buy-to-let property to a limited company is one of the most important and critical decisions which entirely depends upon the portfolio, financial situation and future plans of the landlord, as there is ‘no one size fits all’ strategy. Incorporation is expensive – CGT, SDLT, conveyancing costs, refinancing costs, legal costs unless incorporation relief is available. It would be best if the decision should be taken with utmost care as any wrong decision could put you into tax traps that may cost you big. However, before taking such a big decision, advice from a professional expert is highly recommended.

Maybe you are planning to start your journey as a landlord or already have an extensive portfolio; get in touch with us for the perfect advice.

Also See:Buy To Let Limited Company Mortgages- Benefits for Small Business Owners

In case you are having any query or want specialist advice on "Transferring buy-to-let property to a limited company", kindly book a call with us.

About the author

Owais Bombaywala
Working closely with individuals and businesses to help grow their business requires a significant amount of experience and industry knowledge. Owais is BA (Hons) Accounting and Finance and Member of ACCA. Besides being a compliance champion, he specialises in Property tax planning. With over 7 years of experience in Accountancy and Tax world, our clients count on us to give them timely and up to date advise to help them make the right move. Owais works closely with some of the DNS’s most valued clients to give them the confidence they need to focus on their business. He is known for his calm nature and proactive approach. At DNS, we proud to be a modern and client centric firm. Our advise doesn’t just look at what’s best for your business moreover our aim is to help you achieve your personal goals. Away from work, he resolve family disputes and provide care and support to elderly people. He is a founding member of Human welfare organisation Hounslow.